E ditor’s Comment
BY TERRENCE O’KEEFE
S urvival of the fit enough
Have you heard the story in
which two hikers round a
bend in the trail and find
themselves facing a large, hungry-looking bear? Both hikers turn and
start to run as fast as they can away
from the bear. One hiker asks the
other, “Do you really think that you
can outrun this bear?” To which the
second hiker replies, “No, but I only
have to be able to outrun you.”
Poultry companies are involved in
a similar race, but instead of being
panies are experiencing depend on a
number of factors, such as how well
they forward bought grain and how
much exposure they have to commodity meat markets on the sales end. The
losses are real, and in some cases,
dramatic. In early July, I was told by
a turkey industry executive that at $8
corn and current dark meat prices,
break-even pricing for turkey breast
meat was around $2.70 per pound. At
that time breast meat trading was soft
at around $1.70 per pound. Even when
been some consolidation of the
industry in the
first half of the
year. Grain costs
have increased
so dramatically
and future grain
prices are so difficult to predict that
it is possible that some of the necessary production cutbacks that poultry
companies face may not be made
voluntarily.
The current
Surviving companies don’t have to be competition be- tween poultry
the “fittest;” they just have to be “fit enough.” companies may not be decided by
which companies
have the best feed conversion, yield or
marketing plan. It may come down to
which companies have the strongest
balance sheet, the best current ratios,
the least leverage or who hedged
grain well.
Charles Darwin introduced the
world to the idea of natural selection
and the phrase “survival of the fittest”
came to be used almost synonymously
with it. In business and economics,
“survival of the fittest” has come to
characterize how the weak and inflexible companies fall by the wayside
and the strong and adaptable live to
compete into the next business cycle.
But, “survival of the fittest” implies
that only the strongest company survives, and that is not usually the case.
Surviving companies don’t have to be
the “fittest;” they just have to be “fit
enough.”
chased by a bear, they face dramatically higher grain and energy costs
in a marketplace with a relative surplus of meat. In mid-summer, corn,
soybean and crude oil prices were at
all-time highs.
Corn prices even topped the $8 per
bushel level briefly in June. Feed ingredient costs have more than doubled
in the last two years, and poultry meat
prices have not risen enough to offset
these increases. John Petersen in this
month’s By The Numbers column
predicts that the U.S. per capita meat
supply will not be reduced until early
2009. If he is correct and meat supply
remains up or only slightly down for
the rest of this year, then meat prices
will not rise to levels that will allow
companies to move back into the black
until next year.
Losses that many poultry com-
breast meat hit its all-time low at $1
per pound, turkey companies were not
losing $1 per pound on breast meat.
On the broiler side, Pilgrim’s Pride,
the U.S.’ largest broiler processor, reported a $111 million loss in its fiscal
second quarter which ended March 29.
That is a loss of around $1 million per
day, and that was before corn prices
rose to their current heights. The
challenges that the broiler and turkey
industries currently face are probably
the toughest in the 22 years that I have
been in or around the industry.
The supply of poultry meat will fall
to a level that will result in increased
prices, which will return the industry
to profitability, eventually. This will
be a painful process. Some broiler
and turkey companies have already
cut bird placements, and in some cases
have closed plants. There has even
